Educational Articles

The Dogs of the Dow Regain, and Maintain Their Lead

Mario Ferro
| May 06, 2014

The Dogs Move Ahead By a Couple of Lengths

The year didn’t start off so great for equities, with the Dow Jones Industrial Average’s 5% decline in January marking its worst month since August of 2013. The index, along with equities in general, returned to the black over the following three months, and an equally weighted position in all 30 Dow Industrials would have been up 1.1% for the year through April.

Meanwhile, the Dogs of the Dow have performed modestly better. Investing in only the 10-highest yielding Industrials at the start of the year would have also met with a setback in January, although a relatively modest decline of 3.3%. February’s rebound found them a shade behind the rest of the Industrials, but they moved ahead in March and added to their lead last month. For April, the Dogs gained 1.8% in market value, versus 1.0% for the Dow as a whole, and 0.6% for the 20 Industrials outside of the Dogs. As for the cumulative score, the Dogs have advanced 3% through the first four months of the year. This compares to a gain of 1.1% for an equal weighting in all 30 Industrials, and a scant 0.1% for the “non-dogs”.

April’s Leaders and Laggards

Several of these higher-yielding issues posted solid gains for April, led by Chevron (CVX – Free Chevron Stock Report), which advanced 5.6%. Shares in the world’s fourth-largest oil company have spent most of 2014 in negative territory, as sales and earnings both appear to be headed for a third consecutive year of decline. However, this trend stands a good chance of reversing itself in time, as several projects Chevron has in the works gradually come on line. In the meantime, the company recently raised its dividend by 7%, to $1.07 per share. Based on the recent quotation, this lifts the stock’s yield to 3.4% on a 12-month forward basis; the Value Line median is 2.0%. Also, ongoing share buybacks should help bolster the bottom line.

General Electric (GE - Free GE Stock Report), took second place with a gain of 3.9% on the month. Investors appear to have reacted favorably to management’s recent statements indicating European operations have perked up over the last three months and that the outlook for that region was positive. Too, developing nations continue to be a strong source of growth for the industrial conglomerate.

On the other side of the coin, Pfizer (PFE - Free Pfizer Stock Report), was a modest drag on the Dogs’ performance with its 2.6% decline in price. The drug giant’s stock remains up for the year as a whole, though, and its ongoing efforts to acquire its London-based rival AstraZeneca (AZN) may add a speculative kicker to these otherwise conservative shares.

Slightly less detrimental were the 1.8% and 1.4% slips, respectively, in shares of Verizon (VZ - Free Verizon Stock Report), and Microsoft (MSFT - Free Microsoft Stock Report). First-quarter earnings at the telecom giant were up a hefty 24% over the prior-year period, but investors seemed to be hoping for even stronger numbers. Meanwhile, the software behemoth reported a 6% decline in March-quarter earnings, on relatively flat revenues. For the year to date, though, the issue remains the second-best performer among the Dogs, with a gain of 8%.

Merck Widens its Lead

The biggest contributor to the Dogs’ edge over the rest of the Dow so far this year has been Merck & Co. (MRK - Free Merck Stock Report). With a 17% cumulative gain through the first four months (up 3.2% in April), the stock has set new 52-week and multi-year highs in recent weeks. The New Jersey-based drug maker reported first-quarter earnings that handily beat Wall Street’s expectations, as increased cost cutting helped to mitigate the impact of continued generic erosion on several former blockbuster medications. Moreover, with generic pressures easing, and core franchises performing well, we believe the company is in a much more-favorable position to increase its top and bottom lines in the years ahead.

Conclusion

Overall, the Dogs of the Dow strategy has performed well this year, edging out the remaining Dow components in three out of the four months through April and cumulatively for the year. To be sure, equity valuations, in general, are comparatively elevated, and nearly all of the Dogs carry Average Timeliness ranks for year-ahead relative performance. However, we think the market can continue to move higher, though perhaps not in a straight-line fashion. Recent developments supporting our view include increases in the leading economic indicators, durable goods orders, and industrial production, which altogether point to improving GDP growth in the quarters ahead.

At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.